caiib super notes: bank financial management: module c: treasury management: introduction to...

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Introduction to Treasury Management

Module C: Treasury Management

CAIIB – Super-Notes © M S Ahluwalia Sirf Business

CAIIB – SUPER NOTES

Bank Financial Management: Introduction to Treasury Management

CAIIB – Super-Notes © M S Ahluwalia Sirf Business

Contents

Coverage:

1. The Concept

2. Functions of Integrated

Treasury

3. The Process of Globalisation

4. Evolving role of treasury as

profit center

5. Organisation of Treasury

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THE CONCEPT

1.

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The Concept

Funds Management

Funds Management

Liquidity Management

Liquidity Management

Profit Center Profit Center Asset Liability Management Asset Liability Management

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FUNCTIONS OF INTEGRATED TREASURY

2.

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Integrated Treasury

• Integrated Treasury refers to integration of money market,

securities market and foreign exchange operations.

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Driving force for Integrated Treasury

Integrated Cash Flow

Management

Integrated Cash Flow

Management

Interest Arbitrage Interest Arbitrage

Access to Global Resources

Access to Global Resources

Corporate demand for high-

end services

Corporate demand for high-

end services

Risk Management

Risk Management

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Functions of Integrated Treasury

Meeting reserve requirements (CRR and SLR) Meeting reserve requirements (CRR and SLR)

Global cash management Global cash management

Efficient merchant services (Forex and Advisory Services) Efficient merchant services (Forex and Advisory Services)

Optimizing profit by exploiting market opportunities in ForEx market, money market and securities market (debt, equity and credit derivatives markets) Optimizing profit by exploiting market opportunities in ForEx market, money market and securities market (debt, equity and credit derivatives markets)

Risk management Risk management

Assisting bank management in ALM Assisting bank management in ALM

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An overview of Integrated Treasury function

SLR/CRR SLR/CRR

Equity/MF/Venture Fund.

Equity/MF/Venture Fund.

Funds Management/L.A.F/CB

LO/Market repo/FC Buy sell swap/ALM

Funds Management/L.A.F/CB

LO/Market repo/FC Buy sell swap/ALM

Raising of Tier II capital.

Raising of Tier II capital.

Corporate Debt /Debenture.

Corporate Debt /Debenture.

Derivatives. Derivatives. Foreign Exchange Foreign Exchange

Call/Notice/Term MoneyCP,CD,IBPC,. Call/Notice/Term

MoneyCP,CD,IBPC,.

Front office/Mid Office./Back office.

Front office/Mid Office./Back office.

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Roles of Treasury

• Managing short term funds across currencies

• Complying with reserve requirements

Liquidity Management Liquidity Management

• Trade in currencies, securities and other financial instruments with a profit motive

Proprietary Positions Proprietary Positions

• Aid management in bridging Asset liability mismatches

• Provide derivatives to manage risks in client’s business

• Manage risks inherent in its own proprietary positions

Risk Management Risk Management

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Books

ALM Book ALM Book

• Internal risk management

Merchant Book Merchant Book

• Client related currency and derivative transactions

Trading Book Trading Book

• Managing Proprietary positions

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THE PROCESS OF GLOBALISATION

3.

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The Process of Globalisation

• The process of integrating domestic market with global

markets, characterised by free capital flows and minimum

regulatory intervention

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Funds flow on Capital Account

Portfolio Investment

•Foreign investors investing in domestic equity and debt markets

Portfolio Investment

•Foreign investors investing in domestic equity and debt markets

Direct Investment

•Foreign companies and FIIs bringing in long term funds

Direct Investment

•Foreign companies and FIIs bringing in long term funds

External Commercial Borrowings External Commercial Borrowings

Issue of equity/debt in global markets Issue of equity/debt in global markets

Cross border Mergers and Acquisitions Cross border Mergers and Acquisitions

Payment for technology transfer, royalties, financial services etc Payment for technology transfer, royalties, financial services etc

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Impact of Globalisation

• In turn influence exchange rates

• In an open economy exchange rates are further influenced by macro-economic factors like relative inflation, GDP growth rate, stock markets and commodity markets

Interest rates influenced by Global Trends Interest rates influenced by Global Trends

• Number of primary dealers have become active players

• Resulted in deepening of debt and equity markets and eliminating counterparty risks

New Institutional Structure has come into place New Institutional Structure has come into place

• Not only for hedging but also for trading and profit generation

Rupee Derivatives with innovative product structures Rupee Derivatives with innovative product structures

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EVOLVING ROLE OF TREASURY AS PROFIT CENTER

4.

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Importance of Treasury Profits

• Operates in inter-bank markets – almost free of credit risk

• Highly leveraged, hence return on capital is very high

• Operational costs are low

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Sources of Treasury Profits

Conventional Conventional

Foreign Exchange Business

Money Market Deals

Investment Activity

Contemporary* Contemporary*

Interest Arbitrage

Trading

Treasury Products

* In addition to the conventional sources

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ORGANISATION OF TREASURY

5.

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Organisation of Treasury

• Either as department or Specialised Branch

• Latter is preferred because

– Books of accounts can be maintained independently

– Can act as authorised dealer for For Ex business

– Can participate in clearing and settlement systems directly

• Headed by a senior management person

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Treasury Divisions

FRONT OFFICE/ DEALING ROOM FRONT OFFICE/ DEALING ROOM

BACK OFFICE/ TREASURY

ADMINISTRATION

BACK OFFICE/ TREASURY

ADMINISTRATION

MID OFFICE/ RISK

MANAGEMENT

MID OFFICE/ RISK

MANAGEMENT

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Dealing Room

• Headed by Chief Dealer

• Dealers buy and sell in the markets

• Deal in secondary markets. Primary markets are handled by

investment department

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Back Office

• Responsible for verification and settlement of deals

• Takes care of all related book-keeping and submission of

periodical RBI returns

• Also maintains Nostro accounts, funding and security

accounts with RBI and Demat accounts with depository

participants

• Ensures adequate money is held with CCIL for Rupee and

Dollar settlements

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Mid Office

• To provide information to management and implement risk

management systems

• Monitors exposure limits and stop loss limits

• Implements transfer pricing mechanism

• In smaller banks also functions as ALM support group

• Reports directly to Head of Treasury, or to Chief Risk Officer

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TREASURY STRUCTURE

General Manager General Manager

Chief Dealer (Dealing Room)

Chief Dealer (Dealing Room)

Forex Forex Money Market Money Market

Currency Currency

Merchant Desk Merchant Desk

Derivative Desk Derivative Desk

Securities Trading

Securities Trading

Equity Trading Equity Trading

Equity Investment (Primary)

Equity Investment (Primary)

Chief Risk Officer Chief Risk Officer

Chief Dealer (Dealing Room)

Chief Dealer (Dealing Room)

Forex Forex

Money Market Money Market

Securities Trading

Securities Trading

Chief Dealer (Dealing Room)

Chief Dealer (Dealing Room)

Policy and MIS Policy and MIS

ALM Support Group

ALM Support Group

Chief Dealer (Dealing Room)

Chief Dealer (Dealing Room)

Accounts Accounts

HR & Training HR & Training

Internal Audit Internal Audit

Funds Transfer Branch

Funds Transfer Branch

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Investment Department

• Deals with primary issues

• Puts up investment proposal for approval

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M S Ahluwalia, amongst other things, is a visual artist, blogger,

blog designer and of course an MBA and Banker from New

Delhi, India.

To know more about him you may visit his blog-site: Estudiante De La Vida